When you bought a house with less than 20% down, your mortgage lender tacked on the extra cost of private mortgage insurance (PMI) as a standard precaution. But you’re confident that your house is worth more today than when you purchased it, leading you to wonder: Can I cancel PMI if my home value increases? When does PMI go away?
Whether your individual mortgage qualifies for PMI removal will depend on factors like how much you still owe on the loan and your payment history.
However, the hot real estate market of 2021-2022 meant many homeowners saw their equity rise. Even though a market shift is underway as of late 2022, due to higher interest rates, many homeowners with mortgages may still be sitting on significant equity due to still-high home values. In Q2 2022, a report from CoreLogic shows that homeowners with mortgages saw an equity increase of nearly 27.8% year-over-year. CoreLogic forecasts an average rise in home prices of 4.3% between June 2022 and June 2023.
In light of this trend, now would be a good time for many borrowers to see if they qualify for PMI cancellation. A higher equity stake in your home can lower the perceived risk of your mortgage and in some cases speed up the path to PMI removal.
And because PMI can add tens of thousands of dollars in housing costs over the life of a loan, it’s important to consider taking steps to remove PMI as soon as you’re eligible.
Let’s take a look at how PMI works, and your options for cancellation.
What is PMI?
PMI is a type of mortgage insurance that protects the lender if a borrower stops making payments.
PMI is usually required when you obtain a conventional mortgage and make a down payment of less than 20%. (The term “conventional” refers to a loan that’s not part of a government program).
If — for any reason — you’re unable to keep up with your mortgage payments and the property goes into foreclosure, PMI will help to cover the lender against losses.
Most homeowners who carry PMI have borrower-paid private mortgage insurance, which they pay as an additional monthly fee with their mortgage.
According to data from the National Association of Realtors, the typical down payment in 2020 was 13%. On average, first-time buyers put down 7%, while repeat buyers put down 17%.
In other words, you’re not alone in paying PMI. It’s incredibly common. Sometimes paying PMI as an extra monthly charge is well worth the ability to buy a home before you can afford 20% down.
The cost of PMI typically ranges from 0.5%-1% of your loan amount annually (though it can be higher or lower depending on your loan-to-value ratio).
What is loan-to-value ratio?
An important term to know in relation to PMI is loan-to-value ratio, often shortened to LTV.
LTV expresses the amount of your mortgage’s principal balance compared to the purchase price of the home. Lenders use LTV to measure their perception of a loan’s risk, including when a borrower is eligible to cancel PMI.
Let’s say you purchase a $300,000 home and put $42,000 or 14% down. That means the loan amount will be $300,000 minus $42,000, or $258,000.
To calculate the LTV ratio, divide $258,000 by $300,000 to get 86. Expressed as a percentage, this is 86%. The LTV ratio is 86%.
PMI is generally required for borrowers who take out a conventional mortgage with a loan-to-value ratio of 81% or higher.
In this example, the lender will charge PMI until you qualify for auto-cancellation at 78% LTV or request PMI termination at 80% LTV.
How do I know if I qualify to cancel PMI?
There’s more than one route to canceling PMI. Next, we’ll go further in depth on your main PMI cancellation options.
1. You qualify for auto-cancellation with a 78% LTV.
Under rules outlined by the Homeowners Protection Act (PMI Cancellation Act) of 1998 or HPA, homeowners have the right to have their PMI removed automatically on the date that their principal balance is scheduled to reach 78% of the original value.
On a home you bought for $300,000, you would qualify for auto-cancellation when your mortgage balance hit $234,000. (Divide $234,000 by $300,000 to get 78% LTV).
A homeowner must be current on their payments for this automatic removal to occur. In addition, auto-removal does not take into account property upgrades or market appreciation. It is only based on how much you originally bought the house for.
2. You hit 80% LTV and request removal.
HOPA also allows homeowners to initiate PMI removal once the principal balance of their mortgage drops to 80% of the original value of their loan. In our $300,000 home example, you would have the ability to request PMI removal once the amount owed on your loan hit $240,000 (or 80% of $300,000).
You could hit 80% LTV ahead of schedule by making extra or larger payments on your mortgage than required. You could also set a notification for the date you’re scheduled to reach 80% LTV so you’re reminded to put in the cancellation request with your mortgage servicer as soon as you’re eligible for PMI removal.
3. You re-appraise your home after it gains value.
Generally, you can request to cancel PMI when you reach at least 20% equity in your home. You might reach the 20% equity threshold by making your payments on time per your amortization schedule for loan repayment. But you also may get to that 20% benchmark faster thanks to rising property values in your area — or by investing in home improvements.
Let’s again say you purchased that lovely home for $300,000 a few years ago with $42,000 or 14% down, so you’re paying PMI. You notice that local news reports indicate that property values are rising. Based on some initial research, you estimate the current value to be $365,000.
So now your equity in the home is $107,000. How did we get there? We took your $42,000 down payment and added $65,000 in equity gains due to market appreciation.
Congrats! You’ve now well surpassed 20% equity (you’re actually now at nearly 30% — or $107,000 in equity divided by $365,000 in value) and that’s not counting the additional equity you’ve built making mortgage payments.
Let’s say you’ve paid $15,000 of your primary mortgage balance, bringing it to $243,000 ($15,000 subtracted from the original balance of $258,000). Meanwhile your home value grew to $365,000. Your new LTV would be 67% ($243,000 divided by $365,000) or well below the 80% threshold.
In any case, it might be time to cancel PMI.
So let’s recap: What just happened?
The above example goes to the heart of the question: Can I cancel PMI if my home value increases? The answer is: Maybe!
“In an upswing like this I would say you have a better chance of getting rid of your private mortgage insurance, but it’s not a guarantee, because it depends on each lender’s process and making that happen,” says Vickie Clark Jennings, a top real estate agent in Fredericksburg, Maryland.
Rising home values can build equity and increase your stake in the property, making you a potentially lower-risk borrower. Sometimes, to cancel PMI, all you must do is make mortgage payments on time and watch your home value grow, then connect with your servicer on next steps.
The same concept applies if you’ve made any major home improvements, such as a kitchen, bathroom, or main bedroom remodel, to increase the appraised value of the home. When the appraised value of your home goes up since the time of purchase, it means your equity has grown and it may allow you to lose the training wheels of your mortgage (we’re talking about PMI!)
So, having a solid idea of your home’s value and how it’s changed can help you track when it might be time to ditch the PMI. But a simple hunch won’t be enough to get your lender to remove it. You’ll need to get an appraisal or another official valuation of your home (more on that below.)
4. You eliminate PMI when refinancing your home.
Refinancing activity remained strong through the relatively low-interest environment of 2021, but, according to Freddie Mac, rising interest rates in 2022 will continue to put a damper on mortgage refinancing activity.
When you apply for a refinance, your lender will typically require an appraisal. If, based on the home’s appraised value, you have at least 20% equity, “then the second that that loan closes, the new loan starts without private mortgage insurance from the start,” shares Richie Helali, a mortgage expert with HomeLight Home Loans.
Though keep in mind that you’ll have to pay closing costs on the refinance, including paying for that appraisal.
5. You’re midway through your loan’s term.
If you are up to date and current on your PMI payments, then the lender must terminate PMI the month after you reach the midpoint of your loan’s amortization schedule, according to guidance from the CFPB.
If you’re midway through your loan’s term, this PMI termination applies even if you have not reached 78% of the original value of your home. For example, on a 30-year loan, PMI would be removed after 15 years.
What else may be required to cancel PMI?
If you want to cancel your PMI before auto-termination or be sure that you qualify at the 80% threshold, you may need to meet the following requirements or take these steps.
Written or verbal request
A borrower may need to submit a written request to their mortgage servicer to initiate PMI cancellation. To confirm, you can contact the lender ahead of time and ask about the process of removing PMI.
“Normally phone calls to mortgage servicers are recorded, so that may count as a request for the PMI removal as well,” advises Helali. “It might be a little different from servicer to servicer, so it’s always best that we can start with a phone call to go over the guidelines and what is required.”
Acceptable payment history
A homeowner likely needs to have a history of paying on time and be up to date with mortgage payments to have their PMI removed. Late payments in recent months may disqualify you from canceling PMI.
“A strong payment history usually mentions that over the previous 12 months, you haven’t had a late payment,” says Helali. “A late payment is often defined as more than 30 days late.”
Reach out directly to your loan servicer for more information about the requirements for your mortgage.
No secondary liens
Your lender might need to certify that there are no liens, such as unpaid contract work, second mortgages, IRS, or outstanding HOA dues, on your property before you can cancel PMI.
In addition to meeting the LTV requirements for PMI removal, your lender may also require a minimum payment history or loan tenure, known as a “seasoning” requirement. According to Fannie Mae, loans between two and five years must have a 75% LTV or less to be eligible for PMI removal, or 80% or less if the loan is greater than five years.
“In order to get your private mortgage insurance removed, you may need to be on the loan for a minimum of 12 months,” shares Helali. “After you’ve been on the loan for one year, the lender should automatically dissolve the PMI when you have 22% equity in the home.”
However, understand that the lender will only automatically drop your PMI when you’ve reached 22% equity from paying down your home loan — they will not do so for market equity. In any case, a “seasoning” rule could potentially impact your ability to get rid of PMI if your mortgage is on the newer side; however, it is dependent on your specific lender’s requirements, so always reach out to your servicer to confirm.
Proof of home value
If you’re relying on equity gains to cancel PMI, telling your lender about the recent sales and property value increases in your neighborhood won’t move the needle. You’ll need some stronger data for this argument, most likely a professional appraisal or a broker price opinion (BPO), depending on what state you live in.
Before jumping into the appraisal or BPO, consider the following:
Does the lender require a third-party appraiser? Most appraisers for mortgage-related matters will need to be provided by an appraisal management company (AMC) independent of the lender and borrower. So check whether you need to arrange the appraisal or BPO through your mortgage servicer, rather than hire out your own valuation. You could go through the trouble and expense of obtaining an appraisal, only to have to pay for another one.
Will you still save money post-appraisal? If you’re mere months away from hitting 20% equity to automatically remove PMI, you might think twice about kicking off this process. An appraisal on average will cost a homeowner between $450-$550. The cost of an appraisal might exceed the PMI you’d need to pay to get to 80% LTV.
Why do I have to wait to cancel PMI?
You have to wait to cancel PMI because the extra cost is meant to protect the lender until you’ve gained more equity in your home. PMI is for the lender’s benefit and it will not help you in the event of foreclosure. But until a homeowner hits that 20% equity benchmark, they will have to make those PMI payments in full.
What about mortgage insurance for FHA loans?
If you have a loan from a government program, such as an FHA loan, the extra insurance you pay to your lender is just called Mortgage Insurance (MI), and it comes with different rules regarding removal.
For example, if your down payment on a home purchased with an FHA loan was less than 10%, you cannot cancel MI unless you refinance with a non-FHA loan. This applies to any FHA loans obtained after 2013. When in doubt, reach out to your mortgage servicer to learn the specifics about canceling MI on your specific loan type and to inquire whether any options for removal are available.
Canceling PMI: How much will you save?
In the grand scheme of all your housing costs — including the mortgage payment, homeowners insurance, maintenance, and property taxes — PMI might not seem like much. But it adds up.
Factors like your LTV and credit score will determine the exact cost of your PMI insurance premium and what you can save by canceling it. That said, every bit of savings counts. Hopefully eliminating that monthly fee allows you to spend that money on something way more fun than insurance.
Do a little homework, then contact your mortgage servicer. Armed with information from this guide, you’ll be ready to make a cancellation request, inquire about scheduling an appraisal, or at least find out how many more months until you’re free of PMI payments. It will be a day to celebrate!
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